Suppose a $1 tax is levied on each unit of output in a perfectly competitive industry, we know that:
A)the number of firms in the industry will increase in the long run as long as the demand curve is downward sloping.
B)the number of firms in the industry will decrease in the long run as long as the demand curve is downward sloping.
C)firms will no longer produce at the bottom of the average cost curve in long run equilibrium.
D)firms will no longer produce at the top of the average cost curve in long run equilibrium.

Question

Quizplus · Accepted Answer

A $1 tax increases costs, reducing profits. In the long run, firms exit the industry if they can't cover costs, decreasing the number of firms.

Suppose a $1 Tax Is Levied on Each Unit of Output